Though consumers have competently held up the economy for the past year, the party won't continue much longer. The National Retail Federation (NRF) revised its 2005 sales forecast based on the inclusion of new merchandise categories, predicting that retail industry sales (which exclude motor vehicles, gas stations, and restaurants) will increase 4.8% from last year. In its quarterly Retail Sales Outlook Report, NRF cites tough comparisons and a slowing economy as contributors to weaker growth than last year. Retail industry sales grew 7.0% in 2004, the highest growth since 1999.
“The indomitable consumer has kept on spending in spite of high levels of debt and extremely low savings, but this pace cannot continue much longer,” said NRF Chief Economist Rosalind Wells. “In addition to tough comparisons, which will plague the retail industry for most of the year, consumers will be stretched thin from rising interest rates, high energy prices, and modest gains in employment and income.”
One bright light in the economy appears to be in business investments, which have increased substantially. Many companies, experiencing healthy profits and high levels of cash flow, are making large productivity-enhancing investments. NRF expects business capital spending to continue to rise this year.
According to the Retail Sales Outlook, several retail categories are poised for strong growth in 2005, including building materials and garden equipment stores, luxury retailers, warehouse clubs, and electronic shopping. Retailers that may be particularly challenged include discounters, whose shoppers will be most affected by higher gas prices, and department stores, who are still struggling to define themselves.
NRF also expects that sales of furniture and home furnishings, which have experienced very strong growth in the last few years, will start to soften as mortgage rates rise and housing becomes less affordable.
First quarter retail industry sales increased 5.4%. NRF's forecast for the remainder of the year is to see gains of 5.0% in both the second and third quarters and a gain of 4.1% in the fourth quarter.
NRF had previously forecast a 3.5% rise in GAFS sales, which excluded sales at food and beverage stores, building materials and garden equipment stores, health and personal care stores, and miscellaneous retailers including florists and gift shops. The two forecasts represent different categories; therefore, they are not comparable.